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Coda Octopus Group, Inc.
Quarterly Report
May 1, 2012 – July 31, 2012
Address:
4020 Kidron Road
Suite #3
Lakeland
Florida 33811
Phone: + 1 801 973 9136
Fax: + 1 801 973 9285
Symbol: CDOC
September 13, 2012
1
Forward-Looking Statements
This report contains statements that do not relate to historical or current facts, but are “forward
looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information based on forecasts of future results and estimates
of amounts not yet determinable. These statements may also relate to future events or trends, our
future prospects and proposed new products, services, developments, or business strategies, among
other things. These statements can generally (although not always) be identified by their use of terms
and phrases such as anticipate, appear, believe, could, would, estimate, expect, indicate, intend, may,
plan, predict, project, pursue, will, continue, and other similar terms and phrases, as well as the use of
the future tense.
Examples of forward looking statements in this report include, but are not limited to, the following
categories of expectations about:
• customer demand for our products and market prices;
• general economic conditions
• our reliance on a few customers for substantially all of our sales;
• the intensity of competition;
• our ability to collect outstanding receivables;
• the amount of liquidity available at reasonable rates or at all for ongoing capital needs;
• our ability to raise additional capital if necessary to execute our business plan;
• our ability to attract and retain management, and to integrate and maintain technical
information and management information systems;
• the outcome of legal proceedings affecting our business; and
• our insurance coverage being adequate to cover the potential risks and liabilities faced by our
business.
Actual results could differ materially from those expressed or implied in our forward looking statements.
Our future financial condition and results of operations, as well as any forward looking statements, are
subject to change and to inherent known and unknown risks and uncertainties. You should not assume
at any point in the future that the forward looking statements in this report are still valid. We do not
intend, and undertake no obligation, to update our forward looking statements to reflect future events
or circumstances, except as required by law.
2
Contents
Item 1: The exact name of the issuer and the address of its principal executive offices. ........................ 3
Item 2: Shares outstanding. ........................................................................................................................... 3
Item 3: Interim financial statements. ........................................................................................................... 4
Item 4: Management discussion and analysis of financial condition and results of operations .............. 5
Item 5: Legal Proceedings. ........................................................................................................................... 13
Item 6: Defaults upon Senior Securities. .................................................................................................... 13
Item 7: Other Information. .......................................................................................................................... 13
Item 8: Exhibits ............................................................................................................................................. 14
Item 9: Issuer’s Certifications. ..................................................................................................................... 15
Index to consolidated unaudited financial statements .............................................................................. 16
3
Item 1: The exact name of the issuer and the address of its principal executive offices.
The exact name of the Issuer is Coda Octopus Group, Inc.
The Issuer's trading symbol on the Pink Sheets is CDOC.PK
Its predecessor is The Panda Project, Inc.
The address of the issuer’s principal executive office is:
4020 Kidron Road
Suite #3
Lakeland
Florida 33811
Phone: + 1 801 973 9136
Fax: + 1 801 973 9285
Email: [email protected]
http://group.codaoctopus.com
Item 2: Shares outstanding.
Securities outstanding: Common stock.
Trading symbol: CDOC
CUSIP: 19188U 10 7
The number of shares or total amount of the securities outstanding for each class of securities
authorized.
In answering this item, provide the information below for each class of securities authorized.
Please provide this information (i) as of the end of the issuer’s most recent fiscal quarter and (ii) as of
the end of the issuer’s last two fiscal years.
4
Common Stock
(i) Period end date: September 13, 2012
July 31, 2012
October 31, 2011
October 31, 2010
(ii) Number of shares authorized;
150,000,000 150,000,000 150,000,000 150,000,000
(iii) Number of shares outstanding;
89,754,976 89,754,976 74,339,665 60,614,958
(iv) Freely tradable shares (public float);
34,903,953 34,903,953 30,808,764 19,054,098
(v) Total number of shareholders of record
295 295 300 401
Series A Preferred Stock
(i) Period end date: September 13, 2012
July 31, 2012
October 31, 2011
October 31, 2010
(ii) Number of shares authorized; 5,000,000 5,000,000 5,000,000 5,000,000
(iii) Number of shares outstanding;
6,287 6,287 6,287 6,287
(iv) Freely tradable shares (public float);
-0- -0- -0- -0-
(v) Total number of beneficial shareholders
5 5 5 5
(vi) Total number of shareholders of record
5 5 5 5
Item 3: Interim financial statements.
Unaudited interim financial statements for Coda Octopus Group, Inc. for the period ended July 31, 2012
are included in this Quarterly Report at pages 17 through to 20 inclusive. The unaudited financial
statements contain:
5
1. Condensed consolidated statements of operations and comprehensive income (loss) for the
three and nine months ended July 31,2012 (Unaudited) and 2011 (Unaudited);
2. Condensed consolidated balance sheet as of July 31, 2012 (Unaudited) and October 31, 2011
(Unaudited);
3. Condensed consolidated statement of stockholders’ deficit for the nine months ended July 31, 2012 (Unaudited);
4. Condensed consolidated statements of cash flow for the nine months ended July 31, 2012
(Unaudited) and 2011 (Unaudited); and
5. Notes to consolidated financial statements (Unaudited).
The unaudited consolidated financial statements include the accounts of Coda Octopus Group, Inc and
its domestic and foreign subsidiaries that are more than 50% owned and controlled. All significant
intercompany transactions and balances have been eliminated in the consolidated financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the
unaudited consolidated financials and accompanying disclosures. Although these estimates are based
on management’s best knowledge of current events and actions that we may undertake in the future,
actual results may differ from those estimates.
Item 4: Management discussion and analysis of financial condition and results of operations
Forward-Looking Statements
The information herein contains forward-looking statements. All statements other than statements of
historical fact made herein are forward-looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are forward-looking statements. These
forward-looking statements can be identified by the use of words such as “believes,” “estimates,”
“could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other
variations or similar words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect management’s
current expectations and are inherently uncertain. Our actual results may differ significantly from
management’s expectations.
The following discussion and analysis should be read in conjunction with our unaudited financial
statements, included herewith. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future, or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such discussion represents only the
best present assessment of our management.
6
General Overview
Coda Octopus Group, Inc., (“the Company”, “we”, “us”, “our Group”) has its headquarters in Lakeland,
Florida with operating subsidiaries and research and development facilities in USA, UK and Norway
respectively. The Group has subsea expertise and through its marine operations develops and
manufactures various subsea products including its patented technology the Echoscope® which is a real
time 3D sonar product. In addition, we have engineering operations (located in England and the USA),
which are suppliers to defense prime and sub-prime contractors and which also has subsea and marine
engineering experience which we leverage within the Group.
Recent Developments
Our Group has been the subject of restructuring since October 2009.
Since the Group moved its headquarters to New York in 2005 and became a public company trading on
the Pink Sheet in 2004 it had reported continuing and significant losses.
A new senior management and board were put in place in September 2009 to address the losses, other
historical problems of the Group and to ensure its continuity as a going concern. Since September 2009,
the focus and strategy of the new management has been to restructure the Group by (i) negotiating the
removal of certain barriers to new investments that were contained in a series of securities purchase
agreements; (ii) reducing the Group’s cost base significantly; (iii) simplifying the Group structure; (iv)
restructuring some of the Group’s debts; and (v) taking the business to sustainable growth and
profitability.
In respect of its cost reduction strategy, the new management focused initially on stripping out the costs
associated with having an extended New York administrative center (including the rent and salaries of
the then senior management that was based in New York). Closing the New York administrative center
resulted in approximately $1,200,000 per annum savings in salaries associated with our headquarters
operations. We have significantly reduced the number of headquarters employees and consultants and
have now co-located our headquarters with our US marine technology operational arm, Coda Octopus
Products, Inc., in Lakeland, Florida.
The Selling, General and Administrative (“SG&A”) expenses of the Group have been gradually brought
down to a level which positions the Group’s operations to be viable and profitable. As we cautiously
increase sales and marketing staff and launch new products based on our patented technology, we
envisage SG&A of the Group will continue to be under $6,000,000 compared to:
7
Fiscal year – November 1 – October 31 SG&A Revenues SG&A /
Revenues
2007/08 (Audited) – Full Fiscal Year $13.2m $17.0m 78%
2008/09 (Audited) – Full Fiscal Year $11.2m $13.2m 85%
2009/10 (Unaudited) – Full Fiscal Year $7.7m $11.5m 67%
2010/11 (Unaudited) – Full Fiscal Year $5.3m $15.7m 34%
2011/12 (Unaudited) – Nine Months ended July 31, 2012 $3.5m $15.5m 23%
Initially the new management was faced with a Group which, besides SG&A approximating closely to
revenues, had (as at October 2009) Accumulated Payables and Accrued Expenses and Other Current
Liabilities of $7,016,203. This was made up of $4,626,164 of accrued expenses and other current
liabilities, which included provision for settlement of a number of disputes and other matters, and
$2,390,039 of payables. This figure was a threat to the Group’s continued existence and required us,
over the restructuring period to, amongst other things, consensually reschedule some of the Group’s
liabilities with its creditors, particularly in our wholly owned subsidiary Coda Octopus Martech Limited
(“Martech”) and to use most of the income generated in the course of business to satisfy these.
As of July 31, 2012 we have managed to reduce the $4,626,164 (of Accrued Expenses and Other Current
Liabilities) which was outstanding and shown on our balance sheet as at October 31, 2009 to
$1,128,614, a reduction of 76%, whilst the Accumulated Payables are at $2,065,546. This latter sum
includes an exceptional item of $204,000 to cover a tax liability in the UK and otherwise is at a level now
in line with the increased sales. As of July 31, 2012 the remaining items within our Accrued Expenses
and Other Current Liabilities comprise ordinary and current items such as employee accruals and
provision for taxes and other matters accrued during the ordinary course of our business.
A key achievement of our restructuring has been to reschedule in October 2010 certain liabilities of our
wholly owned subsidiary Coda Octopus Martech Limited. Under this arrangement $945,000 was
consensually rescheduled over a four year period. As of July 31, 2012, Martech has paid approximately
$455,000, thus reducing the balance outstanding under this arrangement to approximately $490,000.
Martech pays approximately $200,000 per year. As of the date of this report, Martech is current under
this arrangement, and will need to keep current to avoid adverse consequences.
Since February 21, 2008 our Balance Sheet also includes a $12 million convertible secured debt (“Debt”).
This Debt is held by Solidor Investments Limited (“Solidor” or “Debenture holder”). The terms of the
Secured Loan provide for an annual interest of 8.5% payable by the Company bi-annually. A primary
focus of our restructuring has been to rehabilitate our income statement in such a way as to reach a
level where the annual coupon obligations associated with this Debt are serviceable. Current revenues
and costs levels of the Group are in keeping with the obligations of servicing this Debt. As of July 31,
2012, the principal Debt amount plus accrued and unpaid interest amounted to $14,477,214. In May
2012, the Company reached an agreement with Solidor to reschedule the interests payments
8
(“Rescheduling Agreement”) provided for under the Secured Loan Agreement. Under the terms of the
Rescheduling Agreement the Company will pay $250,000 annually and the remaining $770,000 will
accrue and be payable at maturity in February 2015. If the Company fails to pay the amounts due
periodically, then the amounts will revert to $1,020,000. The Rescheduling Agreement also provides for
the Company and the Debenture holder to review the revised periodic payment annually to determine
whether its cash flow permits increase in this amount.
In addition, under the terms of the Rescheduling Agreement the Company agreed to issue to the
Debenture holder 15,315,316 shares of common stock in settlement of $1,020,000 representing interest
payment obligations outstanding as of May 2012.
The Debenture holder forgave all defaults including default interests that had been incurred at the date
of the Rescheduling Agreement.
With this level of debt, the failure to maintain our SG&A costs at around $6 million per annum and
achieve revenues in excess of $16 million per annum would threaten our ability to sustain our
profitability going forward.
Results from Operations For the first time the Company has recorded a working capital surplus. As of July 31, 2012, the Working Capital Surplus of the Company was $3,169,451. Comparison of the Nine Months Ended July 31, 2012 to the Nine Months Ended July 31, 2011 Revenues for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31, 2011
Revenues for the Nine Months
ended July 31, 2012*)
Percentage Change Revenues for the Nine Months
ended July 31, 2011*)
$15,493,494 Increase of 50.3% (“Increase”) $10,306,248
*) Unaudited
We believe that the Increase in revenues shown above is due to a number of factors including:
We are generally seeing an uptake in demand for our patented real time 3D sonar product, the Echoscope® and the Underwater Inspection System (UIS™) in the market place;
We have launched various upgrade products which have contributed to our revenues;
Following the restructuring which commenced in 2009 and the reduction in our SG&A expenditure, there is more cash available to convert our order book to revenues (resulting in shorter delivery times), and to seek more beneficial terms from our suppliers.
9
Gross Margins for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31, 2011
Margins for the Nine Months ended July 31,
2012*)
Margins for the Nine Months ended July 31,
2011*)
54.3%
(gross profit of $8,448,717)
52.3%
(gross profit of $5,392,614)
*) Unaudited
Gross Margins have been increasing consistently over the period from 46.6% in the first quarter to
63.1% over the three months reporting period. Some of this fluctuation is due to the mix of business
reported on in each quarter. For example, our engineering businesses, Coda Octopus Colmek and Coda
Octopus Martech, operate on slightly lower margins than the Coda Octopus Products business. In
addition, some of our products attract a higher margin than others. Our Gross Margins therefore vary
according to the mix of products and services sold within the reporting period.
As part of our continued restructuring and focus on corporate governance we are achieving better terms
with our suppliers through volume ordering and more orderly supply chain management. We expect
this to bring further benefits during the remaining quarter of Fiscal Year 2012 and into 2013 and beyond
in the Marine Products business, along with improved margins in the engineering businesses due to
reduced material costs. Nevertheless, it is not likely that the overall profit margin will increase further.
Going forward, we anticipate our annualized Gross Margins to be in the range 50%-60%.
Research and Development (R&D) for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31, 2011
R&D costs for the Nine Months
ended July 31, 2012*)
Percentage Change R&D costs for the Nine Months
ended July 31, 2011*)
$973,991 Reduction of 17.1%
(“Reduction”)
$1,174,768
*) Unaudited
The Reduction in our R&D spending is consistent with the reductions we have made during our
restructuring of the Group. The management would expect to see an increase in R&D spending in the
coming months reflecting further investments in product development. For example, we have recently
announced a new range of patented real-time 3D sonar products (“the Dimension™”) aimed at the
Remotely Operated Vehicle (ROV) market, technology advancement and the continued investment in
our production capabilities.
10
Selling, General and Administrative Expenses (SG&A) for the Nine Months ended July 31, 2012
compared to the Nine Months ended July 31, 2011
SG&A for the Nine Months
ended July 31, 2012*)
Percentage Change SG&A for the Nine Months
ended July 31, 2011*)
$3,523,512 Reduction of 6.2% (“Reduction”) $3,756,771
*) Unaudited
The Reduction in SG&A reflects activity under the cost reduction plan that has been executed between
2009 and 2011. During fiscal year 2012 the Company has started to increase modestly some of its
expenditures, particularly in the areas of sales and marketing of our existing products. In addition, we
have increased marketing expenditures associated with launching new products such as the F170 Series
and DimensionTM, both of which were announced in April 2012 and our TAP rental offering which was
launched earlier this year.
Key Areas of SG&A and R&D Expenditure across the Group for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31, 2011
Expenditure July 31, 2012*) Percentage Change July 31, 2011*)
Wages and Salaries $2,799,411 Reduction of 3.3% $2,897,793
Legal and Professional
Fees (including
accounting, audit and
investment banking
services)
$381,814**) Reduction of 42.6% $665,252
Travel Costs $84,343 Reduction of 53.0% $179,285
Rent and office costs for
our various locations
$482,939 (Rent only
was $249,920
A Reduction in Rent
only costs of 15%
$293,991 (Rent only)
Marketing $182,833 (or $56,676
excluding biannual
major exhibition costs
of $126,157)
An increase of 56%
excluding biannual
exhibition costs
$36,192
*) Unaudited **) We expect to increase significantly our spending in both the categories of Legal and Professional Fees at the end of the year when we anticipate the resumption of the auditing of our consolidated financial statements and also in the category of marketing to reflect the costs of launching the new products announced in this fiscal year.
The management anticipates going forward that we will continue to prudently reinvest in some of these
areas, such as sales and marketing, as we did in the second Quarter where we took a major presence at
Oceanology International Exhibition (London) in March, and which will probably also involve selectively
11
increasing other areas of expenditure, such as travel costs. We would also anticipate our legal and
professional fees increasing as we become fully audited again, probably at the end of this Fiscal Year.
The current levels of expenditure are therefore likely to increase in the fiscal years 2012 and 2013.
Operating Income and/or Loss for the Nine Months ended July 31, 2012 compared to the Nine Months
ended July 31, 2011
Operating Income for the Nine
Months ended July 31, 2012*)
Percentage Change Operating Income for the Nine
Months ended July 31, 2011*)
$3,951,214 Increase of 757% $461,075
*) Unaudited
This increase is attributable to the change in strategy for the Group including the restructuring of the
business under which SG&A was reduced over time, combined with an increase in sales of our real-time
3D sonar product, the Echoscope® and its derivative products such as the Underwater Inspection System
(UIS™).
Other Income for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31, 2011
Other Income for the Nine
Months ended July 31, 2012*)
Percentage Change Other Income for the Nine
Months ended July 31, 2011*)
$905,928 Increase of 11.2% $814,380
*) Unaudited
During Q3 we rationalized some of our subsidiary companies in the USA, and as a result our Other
Income saw some benefit. We continue to anticipate that a large portion of the Other Income will be
non-recurring going forward. Our expectation is that Other Income will reduce to approximately
$150,000 or less per annum going forward
Interest Expense for the Nine Months ended July 31, 2012 compared to the Nine Months ended July 31,
2011
Interest Expense for the Nine
Months ended July 31, 2012*)
Percentage Change Interest Expense for the Nine
Months ended July 31, 2011*)
$1,341.734 Reduction of 3.8 % $1,394,506
*) Unaudited
The reduction in Interest Expense is due to both a reduction in the requirement for short term
borrowing and an improvement in the rates at which the Company can borrow. In both periods we have
included amortization of the 30% redemption premium for our Debenture.
12
Net Income or Loss for the Nine Months ended July 31, 2012 compared to the Nine Months ended July
31, 2011
Net Income for the Nine Months
ended July 31, 2012*)
Percentage Change Net Income for the Nine Months
ended July 31, 2011*)
$3,497,756 Increase of 1,067% $299,787
*) Unaudited
So far this year we have also recorded a positive cash flow from operations of $2,557,920. This
significant increase is attributable to the change in strategy for the Group including the restructuring of
the business between 2009 and 2011 under which SG&A was reduced over time, and an increase in
sales of our real-time 3D sonar product, the Echoscope® and its derivative products such as the
Underwater Inspection System (UIS™).
It is the management’s belief that if the Company is to remain profitable going forward, we will need to
achieve revenues from our operations in excess of $16 million during the current fiscal year. We will
also need to maintain our SG&A expenditures at around the $6m level or less.
Inflation and Foreign Currency.
The Company maintains local currency as follows: US Dollars for the parent holding Company in the
United States of America and the US operations, Pounds Sterling for UK operations and Norwegian
Kroner for Norwegian operations.
The Company’s operations are split between the United States and United Kingdom through its wholly-
owned subsidiaries, with a significant proportion of revenues and costs incurred outside the USA. As a
result, fluctuations in currency exchange rates may significantly affect the Company’s sales, profitability
and financial position when the foreign currencies of its international operations are translated into U.S
Dollars for financial reporting. We are also subject to currency fluctuation risk with respect to certain
foreign currency denominated receivables and payables. Although the Company cannot predict the
extent to which currency fluctuations may, or will, affect the Company’s business and financial position,
there is a risk that such fluctuations will have an adverse impact on the Company’s sales, profits and
financial position. As differing portions of our revenues and costs are denominated in foreign currency,
movements could impact our margins, by example, decreasing our foreign revenues when the US Dollar
strengthens and not correspondingly decreasing our expenditures. The Company does not currently
hedge its currency exposure. In the future, we may engage in hedging transactions to mitigate foreign
exchange risks.
During the Nine Months Ended July 31, 2012, a summary of our material foreign currency transactions
include:
13
UK £ $ NOK $ Total $
Revenues from Foreign
Subsidiaries
5,834,889. 9,181,022 0.00 0.00 9,181,022
Direct Costs of Revenues from Foreign Subsidiaries
3,020,685 4,752,958 317,537 54,216 4,807,174
Direct Costs of Foreign
Subsidiaries
3,795,472 5,972,062 317,537 54,216 6,026,278
The prevailing exchange rates during the Nine Months Ended July 31, 2012 ranged between $1.5296 and
$1.6269 for Pound Sterling and between $0.1633 and $0.1798 for the Norwegian Kroner for the same
period. The above are calculated at $1.57347 and $0.17074 and are the average exchange rates over
the Nine Months.
It is the opinion of the Company that inflation has not had a material effect on its operations. Dividends and Other Stock Charges. No dividends were paid on the Series A Preferred stock in the period, nor were there any paid in the prior year. Off Balance Sheet Arrangements There are no off balance sheet arrangements in the Group that are material, nor were there in the prior year.
Item 5: Legal Proceedings.
There are no legal proceedings in progress within the Group at the date of this filing.
Item 6: Defaults upon Senior Securities.
None
Item 7: Other Information.
In May 2012, Dr. Rolf Kahrs Hansen resigned from the Board of Directors to exploit his Sleep Apnea
Technology. Dr. Hansen remains the Company’s exclusive subsea expert under a consultancy agreement
and continues to be involved in our new generation of 3D products. In May 2012 Blair Cunningham was
appointed to the Board of Directors and as the Company’s President of Technology.
14
During the second quarter of the fiscal year 2012 Greenhouse Investments Limited, our then largest
beneficial stockholder, assigned all its rights in the $12m debentures to Solidor Investments Limited
(“Solidor”). Under the terms of the assignment, the beneficial interest in the shares of common stock in
Coda Octopus Group Inc. which were held by Greenhouse at the date of the assignment (23,576,986)
has also been transferred to Solidor. As a result of the transfer of the beneficial interest in the shares of
common stock to Solidor by Greenhouse Investments Limited and the recently issued shares of common
stock in lieu of the existing coupon obligation (15,315,316), at the date of this report, Solidor is currently
the beneficial owner of approximately 43% of the Company’s common stock.
During the reporting period, the Company entered into a restructuring of the Debentures with Solidor
(“Restructuring Agreement”). Under the terms of the Restructuring Agreement, 75.5% of the annual
coupon of $1,020,000 has been postponed to maturity (2015) as long as the Company pays the
remaining $250,000 on or before 1 November in each calendar year (Revised Annual Coupon Payment).
The Revised Annual Coupon Payment is subject to adjustment based on the Company’s cash
performance annually.
In addition, the Company agreed with Solidor to settle $1,020,000 of existing indebtedness by the
Company through the issuance of 15,315,316 shares of our common stock.
Item 8: Exhibits
There are no arrangements or contracts made that are out of the normal course of business.
15
Item 9: Issuer’s Certifications.
I, Annmarie Gayle, certify that:
1. I have reviewed this Quarterly Report for the Nine Months Ended July 31, 2012 of Coda Octopus Group, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and
3. Based on my knowledge, the financial statements, and other financial information included or incorporated by reference in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the period presented in this Quarterly Report.
Date: September 13, 2012
/s/ Annmarie Gayle
Group CEO
16
CODA OCTOPUS GROUP, INC.
Index to consolidated unaudited financial statements
Page
Condensed consolidated statements of operations and comprehensive loss/gain for the Three and Nine Months ended July 31, 2012 (Unaudited) and 2011 (Unaudited)
17
Condensed consolidated balance sheets as of July 31, 2012 (Unaudited) and October 31, 2011 (Unaudited)
18
Condensed consolidated statement of stockholders’ deficit for the Nine Months ended July 31, 2012 (Unaudited)
19
Condensed consolidated statements of cash flows for the Three and Nine Months ended July 31,
2012 (Unaudited) and 2011 (Unaudited)
20
Notes to consolidated financial statements (Unaudited) 21
Coda Octopus Group, Inc
Consolidated Accounts
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
Income Statement July 31st, 2012 July 31st, 2011 July 31st, 2012 July 31st, 2011
Net Revenue 5,868,068 3,525,442 15,493,494 10,306,248
Cost of Revenue 2,167,542 1,579,090 7,044,777 4,913,634
Gross Profit 3,700,526 1,946,352 8,448,717 5,392,614
Research & Development 333,147 363,447 973,991 1,174,768
Selling, General & Administrative 1,119,934 1,051,244 3,523,512 3,756,771
Operating Income/Loss 2,247,445 531,661 3,951,214 461,075
Other Income (Expense)
Other Income 310,886 634,301 905,928 814,380
Interest Expense (440,508) (486,439) (1,341,734) (1,394,506)
Gain (loss) on change in fair value of derivative liability (341) 81,626 (17,651) 418,838
Unrealized gain on sale of investment in marketable securities 1,700 - -
Realized gain on the sale of marketable securities - -
Total other income (expense) (129,962) 231,188 (453,458) (161,288)
Income (Loss) before income taxes 2,117,483 762,849 3,497,756 299,787
Provision for income taxes - -
Net Income (Loss) 2,117,483 762,849 3,497,756 299,787
Preferred Stock Dividends
Series A - -
Series B
Beneficial Conversion Feature
Net Income (Loss) Applicable to Common Shares 2,117,483 762,849 3,497,756 299,787
Income (Loss) per share, basic and diluted 0.02 0.01 0.04 0.00
Weighted average shares outstanding 89,754,976 74,313,102 89,754,976 74,313,102
Comprehensive loss
Net income (loss) 2,117,483 762,849 3,497,756 299,787
Foreign currency translation adjustment 139,319 154,442 173,704 (152,031)
Unrealized gain (loss) on investment - - - -
Comprehensive income (loss) 2,256,802 917,291 3,671,460 147,756
Balance Sheet July 31st, 2012 October 31st, 2011
Assets
Current Assets
Cash and Cash Equivalents 3,480,865 1,398,289
Short Term Investments 2,231 2,681
Accounts Receivables, net of allowance for doubtful accounts 2,569,709 3,203,361
Inventory 1,666,428 2,002,631
Unbilled Receivables, Note 2 1,010,569 705,391
Other current assets, Note 3 126,923 355,461
Prepaid Expenses 1,148,993 235,899
Total Current Assets 10,005,718 7,903,713
Property and Equipment, net, Note 4 564,502 137,426
Goodwill and other intangibles, net, Note 5 3,789,418 3,852,388
Total Assets 14,359,638 11,893,527
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable, trade 2,065,546 2,248,439
Accrued Expenses and other current liabilities 1,128,614 1,547,428
Short term loan payable 860,133 1,726,507
Loans and note payable, long term, Note 11 406,858 14,756,860
Warrant liability, Note 8 19,494 1,842
Deferred revenues, Note 2 2,355,622 2,996,370
Sundry Creditors - 281,219
Total Current Liabilities 6,836,267 23,558,665
Loans and note payable, long term, Note 11 14,477,214 -
Total Liabilities 21,313,481 23,558,665
Contingencies and Commitments, Note 10
Stockholders' deficiency: -
Preferred stock, $.001 par value; 5,000,000 shares authorized, 6 6
6,287 Series A issued and outstanding, as of -
July 31,2012, 2012 and October 31, 2011, respectively -
Nil shares Series B issued and outstanding as of -
July 31, 2012 and October 31, 2011, respectively -
Common stock, $.001 par value; 150,000,000 shares 89,755 74,339
authorized, 89,754,976 and 74,339,665 shares issued and outstanding -
as of July 31, 2012 and October 31, 2011, respectively -
Additional paid-in capital 48,460,581 47,436,163
Accumulated other comprehensive loss (812,283) (985,988)
Accumulated deficit / surplus (54,691,902) (58,189,658)
Treasury Stock
Capital Surplus
Currency Translation Adjustments -
Total Stockholder's Equity (6,953,843) (11,665,138)
Total liabilities and stockholders' deficit 14,359,638 11,893,527
Additional AccumulatedPreferred Stock Series A Common Stock Stock Paid-in Other Accumulated
Shares Amount Shares Amount Subscribed Capital Comprehensive loss Deficit Total
Balance, October 31, 2011 6,287 6.10 74,339,665 74,339.38 - 47,436,162.94 985,987.59- 58,189,657.51- 11,665,136.87-
Shares issued for compensation 100,000 100.00 110.00 - 210.00
Stock buy back 5- 0.01- 0.01 -
Stock issued for bond interest 15,315,316 15,315 1,004,684.68 1,020,000.00
Fair value of options issued as compensation - - 19,623.39 - 19,623.39
Foreign currency translation adjustment 173,704.22 173,704.22
Net Income 3,497,755.79 3,497,755.79
Balance, July 31, 2012 6,287 6.10 89,754,976 89,754.69 - 48,460,581.02 812,283.37- 54,691,901.72- 6,953,843.47-
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
Cash Flow July 31st, 2012 July 31st, 2011 July 31st, 2012 July 31st, 2011
Cash Flows from Operating Activities
Net income/(loss) 2,117,483 762,850 3,497,756 299,789
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 42,419 51,614 157,506 134,277
Stock based compensation 619 (265,363) 19,833 -
Change in fair value of warrant liability 341 (244,825) 17,651 (582,037)
Financing costs (642,111) 379,922 127,212 244,180
Impairment of investment of marketable securities 450 - 450 1,700
Bad debt expense - - - -
Gain on sale of investment in marketable securities - - - -
Loss on sale of assets - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Short-Term Investments
Accounts receivable 623,600 (976,677) 633,651 (947,515)
Inventory 182,526 (454,244) 336,203 180,432
Prepaid expenses (296,840) (296) (913,094) (218,480)
Unbilled receivables and Other assets 231,164 (83,317) (76,639) 47,097
Intercompany receivables - - -
Increase (decrease) in current liabilities: - -
Accounts payable and accrued expenses (304,097) (1,110,896) (182,892) (234,002)
Deferred revenues 141,640 1,182,636 (1,401,217) (328,754)
Sundry Creditors (116,299) (250,880) 341,500 -
Net cash (used)/generated by operating activities 1,980,895 (1,009,476) 2,557,920 (1,403,313)
Cash Flows from Investing Activities
Purchases of property and equipment (317,487) (123,659) (219,717) (128,194)
Purchases of intangible assets 11,548 (24,483) (301,896) (8,652)
Cash subject to restriction - - - 827,266
Cash acquired from acquisitions - - - -
Net cash provided by/(used in) investing activities (305,939) (148,142) (521,613) 690,420
Cash Flows from Financing Activities
Proceeds from/(repayments of) loans (433,331) 549,622 (1,147,436) 1,418,372
Proceeds for sale of marketable security - - - -
Shares issued for bond interest 1,020,000 268,585 1,020,000 281,983
Common stock subscribed - - - -
Deferred payment related to acquisitions - (112,993) - (112,993)
Preferred stock dividend - -
Net cash (used)/provided by financing activities 586,669 705,214 (127,436) 1,587,362
Effect of exchange rate changes on cash (240,937) 154,443 173,704 (152,031)
Net (decrease)/increase in cash 2,020,688 (297,961) 2,082,576 722,438
Cash and cash equivalents, beginning of period 1,460,177 1,235,603 1,398,289 215,204
Cash and cash equivalents, end of period 3,480,865 937,642 3,480,865 937,642
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
21
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. General The accompanying are unaudited condensed consolidated financial statements. As such they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the Nine Month period ended July 31, 2012, are not necessarily indicative of the results that may be expected for the year ended October 31, 2012. The unaudited condensed financial statements should be read in conjunction with the consolidated unaudited financial statements of October 31, 2011 and footnotes thereto. Business and Basis of Presentation Coda Octopus Group, Inc. (”we ”,“us” “our company ” or “Coda” ) was formed under the laws of the State of Florida in 1992 and re-domiciled to Delaware in 2004 following a reverse merger with The Panda Project. At the same time it changed its name to Coda Octopus Group, Inc. We are a developer of underwater technologies and equipment for imaging, mapping, defense and survey applications. We are based in Florida, with research and development, sales and manufacturing facilities located in the United Kingdom and Norway. We also have our marine engineering operations in the State of Utah, USA and United Kingdom. The unaudited condensed consolidated financial statements include the accounts of Coda and our domestic and foreign subsidiaries that are more than 50% owned and controlled. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements presented with these Notes. Accounts Receivable We periodically review our trade receivables in determining our allowance for doubtful accounts. Allowance for doubtful accounts was $nil for the period ended July 31, 2012 and $nil for the year ended October 31, 2011. Despite making allowances for doubtful accounts in the past, we have not realized any actual bad debt expense during the period for which such allowances were made. Inventory Inventory is stated at the lower of cost or market using the first-in first-out method. Inventory is comprised of the following components at July 31, 2012 and October 31, 2011:
July 31, 2012
Oct 31, 2011
Raw materials $ 868,515 $ 1,076,249 Work in progress $ 320,878 $ 178,096 Finished goods $ 477,035 $ 748,286 Total inventory $ 1,666,428 $ 2,002,631
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
22
Earnings Per Share (“EPS”) Net income (loss) per share Dilutive common stock equivalents consist of shares issuable upon conversion of warrants and the exercise of the Company’s stock options and warrants. Common stock equivalents derived from shares issuable in conversion of the warrants are not considered in the calculation of the weighted average number of common shares outstanding because the adjustments in computing income available to common stockholders would result in a loss. Accordingly, the diluted EPS would be computed in the same manner as basic earnings per share. The following reconciliation of net income and share amounts used in the computation of earnings per share for the Nine Months ended July 31, 2012:
Nine Months Ended July 31, 2012
Net income used in computing basic net income per share
$ 3,497,756Impact of assumptions:
Costs on warrant liability marked to fair value $ 17,651
Net income in computing diluted net gain or loss per share:
$ 3,497,756
Per share basic and diluted net income amounted to $0.04 for the period ended July 31, 2012. Per share basic and diluted net income amounted to $0.01 for the period ended October 31, 2011. Liquidity As of July 31, 2012, we had: Cash and Cash Equivalents $ 3,480,865
Working Capital Surplus $ 3,169451
Deficiency in Stockholders’ Equity $ 6,953,843
Accumulated Deficit $ 54,691,902
Net Income for the Nine Month Period Ended July 31, 2012 $ 3,497,756
Positive Cash Flow from our operations $ 2,557,920 The Company is dependent upon its ability to generate revenue from the sale of its products and services to generate cash to cover its operations. If the Company’s financial resources from operations are insufficient, the Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company may not be able to obtain the necessary additional capital on a timely basis or on commercially acceptable terms, or at all. In any of these events, the Company may be unable to repay its debt obligations, implement its current plans for reorganization, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. NOTE 2 - CONTRACTS IN PROGRESS Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the balance sheet as Unbilled Receivables of $1,010,569 and $705,391 as of July 31, 2012 and October 31, 2011 respectively. Our Deferred Revenue of $2,355,622 consists of (Billings in excess of costs and Revenues received as part of our warranty obligations). This is elaborated further below.
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
23
Billings in excess of cost and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not been earned as of the date of the balance sheet. These amounts are stated on the balance sheet as Deferred Revenue of $1,858,014 and $2,627,137 as of July 31, 2012 and October 31, 2011 respectively. Revenue received as part of sales of equipment includes a provision for warranty and is treated as deferred revenue, along with extended warranty sales, with these amounts amortized over 12 months from the date of sale. These amounts are stated on the balance sheet as Deferred Revenue of $497,608 and $369,233 as of July 31, 2012 and October 31, 2011 respectively. NOTE 3 - OTHER CURRENT ASSETS Other current assets on the balance sheet total $126,923 and $355,462 at July 31, 2012 and October 31, 2011 respectively. These totals comprise the following:
July 31, 2012
Oct 31, 2011
Deposits $ 118,620 $ 98,704 Other receivable
$ 8,303
$ 256,758
Total $ 126,923
$ 355,462
*These figures represent amounts held by third parties to secure certain of our obligations undertaken in the ordinary course of our business, such as rent deposits held as security for the performance of our obligations under these agreements and as is customary for these types of transactions and amounts held on various Customs Accounts as advance against VAT Deposit which is refundable when the goods are re-exported.
NOTE 4 - FIXED ASSETS Property and equipment at July 31, 2012 and October 31, 2011 is summarized as follows:
July 31, 2012 Oct 31, 2011
Machinery and equipment $ 1,226,993 $ 839,481 Accumulated depreciation $ (662,491 ) $ (702,055)
Net property and equipment assets $ 564,502 $ 137,426
Depreciation expense recorded in the statement of operations for the period ended July 31, 2012 was $98,283. This has resulted in a reduction of the accumulated depreciation of $39,564 which is a reflection of the disposal and replacement of some of the older items of Machinery and Equipment held by the Company. NOTE 5 - INTANGIBLE ASSETS AND GOODWILL Goodwill and Other Intangible Assets are evaluated on an annual basis and when there is reason to believe that their values have been diminished or impaired write-downs will be included in results from operations. We have conducted a goodwill assessment and based on the methodology used by the Company we have concluded that goodwill was not impaired as at January 31, 2012 and therefore remains unchanged.
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
24
The identifiable intangible assets acquired and their carrying value at July 31, 2012 and October 31, 2011 is:
July 31, 2012 Oct 31, 2011
Customer relationships (weighted average life of 10 years) $ 694,503 $ 724,243 Non-compete agreements (weighted average life of 3 years) 209,561 $ 228,651 Patents (weighted average life of 10 years) $ 106,739 $ 95,191 Licenses (weighted average life of 2 years) $ 0 $ 0
Total amortized identifiable intangible assets - gross carrying value $ 1,010.803 $ 1,048,085 Less accumulated amortization $ (603,493) $ (577,805 )
Residual value $ 407,310 $ 470,280
Estimated annual amortization expense as of July 31, 2012 is as follows: 2012
$ 78,964
2013 $ 78.964
2014 $ 78,,964
2015 and thereafter $ 176,996
Total $ 413,888
Amortization of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $59,223 and $78,959 for the period ended July 31, 2012 and year ended October 31, 2011, respectively. Goodwill is not being amortized. NOTE 6 - CAPITAL STOCK The Company is authorized to issue 150,000,000 shares of common stock with a par value of $.001 per share. During the reporting period, May 1, 2012 to July 31, 2012, we issued 15,316,315 shares of our common stock to Solidor Investments Limited in lieu of existing interest obligations of $1,020,000. The Company has issued and outstanding 89,754,976 shares of common stock as of September 13, 2012. Other Equity Transactions Common stock options which entitle the holder to purchase under their terms have lapsed or cancelled due to staff departure as follows: Period Number of Options Cancelled
Number of options which expired or were cancelled in the 12 months period ended October 31, 2011
962,900
Number of options which expired or were cancelled in the Nine Months Period
ended July 31, 2012
295,000
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
25
NOTE 7 - WARRANTS AND STOCK OPTIONS Transactions involving stock options and warrants issued are summarized as follows:
Warrants
Nine Months ended July 31, 2012
Year ended October 31, 2011
Number
Weighted Average Exercise
Price
Number
Weighted Average Exercise
Price Outstanding at beginning of the period
5,459,418
$ 1.49
24,119,418
$ 1.47
Granted during the period
—
—
—
— Terminated during the period
(4,799,418) 1.49
(18,660,000 )
1.46
Outstanding at the end of the period
660,000
$ 1.50
5,459,418
$ 1.49 Exercisable at the end of the period
660,000
$ 1.50
5,459,418
$ 1.49
The number and weighted average exercise prices of warrants outstanding as of July 31, 2012 are as follows:
Range of Exercise Prices
Number
Outstanding
Weighted Average Contractual Life
(Years)
Total Exercisable
0.50
- - -
0.58
- - -
1.00
- - -
1.30
330,000 0.58 330,000
1.70
330,000 0.58 330,000
Totals
660,000 0.58 660,000
Stock Options
Nine Months ended July 31, 2012
Year ended October 31, 2011
Number
Weighted
Average Exercise Price
Number
Weighted Average Exercise
Price
Outstanding at beginning of the period 560,000 $ 1.43 1,522,900 $ 1.19 Granted during the period — — - - Terminated during the period (295,000 ) 1.59 (962,900 ) $ 1.05
Outstanding at the end of the period 265,000 $ 1.25 560,000 $ 1.43
Exercisable at the end of the period 265,000 $ 1.25 560,000 $ 1.43
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
26
The number and weighted average exercise prices of stock purchase options outstanding as of July 31, 2012 are as follows:
Range of Exercise Prices
Number
Outstanding
Weighted Average Contractual Life
(Years)
Total Exercisable
1.00
0 0 0
1.05 50,000 2.85 50,000
1.30
215,000 0.93 215,000
1.50
0 0 0
1.70
0 0 0
Totals
265,000 1.29 265,000
NOTE 8 – DERIVATIVE LIABILITY The Company has assessed its outstanding equity-linked financial instruments and has concluded that, effective November 1, 2009, the value of our warrants will need to be recorded as a derivative liability due to the fact that the conversion price is subject to adjustment based on subsequent sales of securities. The cumulative effect of the change in accounting principle on November 1, 2009 includes an increase in our derivative liability related to the fair value of the conversion feature of $2,353,893. Fair value at November 1, 2009 was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 1.06%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 302.22%; (4) an average expected life of the warrants of 2.22 years and (5) estimated fair value of common stock of $0.08 per share. At July 31, 2012 we recalculated the fair value of the conversion feature subject to derivative accounting and have determined that the fair value at July 31, 2012 is $19,194. The fair value of the conversion features was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.19%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 335%; (4) an average expected life of the conversion feature of 0.28 years and (5) estimated fair value of common stock of $0.06 per share. We have recorded a charge of $17,651 during the Nine Months ended July 31, 2012 related to the change in fair value during this period. Approximately ninety-eight (98) percent of our warrants issued in the last 5 years have now expired. As of July 31, 2012 there are 660,000 warrants in issue. NOTE 9 - INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. For income tax reporting purposes, the Company's aggregate U.S. unused net operating losses approximate $25,549,246 as of October 31, 2011, which expire through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset related to the carry forward is approximately $9,496,150, as of October 31, 2011. The Company has provided a valuation reserve against the full amount of the net operating loss
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
27
benefit, because in the opinion of management which is based upon the earning history of the Company it is more likely than not that the benefits will not be fully realized. For income tax reporting purposes, the Company's aggregate UK unused net operating losses approximate $3,202,189 with no expiration. The deferred tax asset related to the carry-forward is approximately $11,584,542. Components of deferred tax assets as of July 31, 2012 and October 31, 2011 are as follows: Non-Current July 2012 October 2011
Net Operating Loss Carry Forward $ 11,584,542 $ 11,584,542 Valuation Allowance $ (11.584,542 ) $ (11,584,542)
Net Deferred Tax Asset $ — $ —
NOTE 10 - CONTINGENCIES AND COMMITMENTS Litigation As of the date of this filing we have no litigation pending. Operating Leases We occupy our various office and warehouse facilities pursuant to both term and month-to-month leases. Our term leases expire at various times through September 2015. Future minimum lease obligations are approximately $864,461, with the minimum future rentals due under these leases as of July 31, 2012 as follows: 2012 $ 76,590 2013 $ 296,527 2014 $ 250,084 2015 and thereafter $ 164,670
Total $ 787,-871
CODA OCTOPUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2012 (UNAUDITED)
28
NOTE 11 - NOTES AND LOANS PAYABLE A summary of notes payable at July 31, 2012 and October 31, 2011 is as follows:
July 31, 2012 Oct. 31, 2011
On February 21, 2008 the Company issued a convertible secured debenture with a face value of $12M (“Secured Debenture”). The Secured Debenture matures on February 21, 2015 at 130% of its face value. The Secured Debenture attracts interest of 8.5% payable every six months, starting from February 21, 2009. During the term the Secured Debenture is convertible into shares of our common stock, at the option of the Debenture holder, at a conversion price of $1.05. We may also force the conversion of these Notes into our common stock after two years in the event that we obtain a listing on a national exchange and our stock price closes on 40 consecutive trading days at or above $2.50 between the second and third anniversaries of this agreement; $2.90 between the third and fourth anniversaries of this agreement; and $3.50 after the fourth anniversary of this agreement or where the daily volume weighted average price of our stock as quoted on OTCBB or any other US National Exchange on which our securities are then listed has, for at least 40 consecutive trading days closed at the agreed price
$ 14,727,214
$ 14,596,500
The Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year unsecured loan note for £100,000; interest rate of 12% annually; repayable at borrower’s instigation or convertible into common stock when the share price reaches $3.
$ 156,858
$ 160,360
Total
$ 14,884,072
$ 14,756,860 Current portion & other loan notes (1) $ 406,858 $ 14,756,860
Total long-term borrowings
$ 14,477,214
$ 0
(1) In May 2012, the Company and the existing Debenture holder, Solidor Investments Limited, reached an
agreement to reschedule the existing interest payments (“Rescheduling Agreement”) provided for under the
Secured Loan Agreement. Under the terms of the Rescheduling Agreement the annual interest payments
will remain the same but the Company will pay $250,000 annually and the remaining $770,000 will accrue
and be payable at maturity in February 2015. If the Company fails to pay the amounts due periodically,
(that is the $250,000 along with any agreed adjustments under the adjustments provisions) then the
amounts will revert to $1,020,000 annually. In the said Rescheduling Agreement existing defaults and
other default interests were forgiven by the Debenture holder. Additionally, the Company agreed with the
Debenture holder to issue 15,315,316 in lieu of $1,020,000 interest obligations that were outstanding at the
date of the Rescheduling Agreement. This has caused our indebtedness under the Debenture to be reduced
by $1,020,000 resulting in a positive impact on our cash flow statement and our balance sheet.
NOTE 12 – SUBSEQUENT EVENTS
None
